24 November 2020

A first look at the National Security and Investment Bill

By

The Government is hoping to go on an inward investment drive next year. Let us hope the new National Security and Investment Bill does not spoil it.

The Bill gives Ministers wide ranging power to investigate and block takeovers and asset purchases, including in Scotland, and potentially gets right into the heart of the market economy. Buying and selling of companies and assets does not always present an edifying spectacle to outsiders, but investors usually buy shares in a business supportively or to invest further in it, and the ability to sell an investment later is fundamental to making it in the first place.

This process explains why, according to the OECD, Britain has managed to attract more than $750 billion of foreign investment in the last decade. Our deep, liquid, and open capital markets are a vital source of finance to companies, which can no longer rely on our pension funds for support, as they have been diverted into global equities and government bonds.

Sometimes, this free market presumption needs to be qualified. For example, we do not want mischievous foreign investors and states buying up our critical defence or technology assets. This is where we come to the National Security and Investment Bill, which we are told draws on equivalent regimes in Australia, Germany and the United States.

It was first debated by the House of Commons last week and, unusually, it was supported on the face of the Bill by no less than 10 secretaries of state, including the Prime Minister and the Chancellor. So far only the Institute of Directors seems to have raised objections.

“Malicious investment”

The accompanying press release from the Department for Business, Enterprise and Industrial strategy (BEIS), that push-me-pull-you ministry created by Theresa May, proclaims the legislation will “protect the UK from malicious investment and strengthen economic resilience”. That is one way of putting it. Another would be that its wide-ranging provisions worryingly extend executive power to intervene in the economy.

There are three potential problems with this Bill.

Catch-all

First of all, it is a myth that the powers of the bill are limited to national security (which is anyway not defined). An initial list of 17 sectors where Alok Shama, the current secretary of state, can intervene, includes transport, communications, energy, critical suppliers to the Government, artificial intelligence and autonomous robotics.

The list of relevant assets is not limited to companies but includes: land, ideas, trade assets, formulae, designs, plans, drawings and specifications.

The secretary of state can add to the list at any time by placing a statement before Parliament.

“Trigger events”

Second, the processes envisaged are somewhat cumbersome and uncertain. Investors or businesses only have to contemplate a “trigger event”, such as a sale or merger, and if the Secretary of State gets wind of it – i.e. it is leaked – and he reasonably suspects a national security risk, he can “call it in” and commence an “assessment procedure” which can take up to 75 working days, i.e. three and half months, with a potential “voluntary extension” on top.

If you are considering any merger or an acquisition of more than 25% of shares in a company with turnover of £70m or more in a relevant sector, then you must tell the Secretary of State via a “mandatory notice”. He then has 30 working days to conduct a review and give his approval or issue a call-in notice.

During an assessment, the Secretary of State can issue all manner of “information notices” or “attendance notices” and woe betide you if you do not comply. Among the sanctions in the Bill are that a company could be fined £10m and you could face up to five years in prison.

Leaks, anyone?

Third, it is very unclear how these new rules dovetail with existing regulations, such as the 60-day period in the takeover code, or the inside information regulations. City folklore is that the best way to ensure something commercially sensitive is leaked, is to tell the Government. Takeovers can degenerate into a brawl, with money, power, livelihoods, emotion, and reputations at stake.

Put the whole process together and those investing in UK assets or businesses could find themselves stuck in a lengthy, unpredictable, legal process, with controversies in Parliament and the media, lobbyists trying to find out what is going on, awaiting Cabinet decisions and endless requests for meetings and information.

Alok Sharma and the nine other Ministers backing the legislation claim this will not happen because the majority of transactions will require no intervention. But what happens if someone like Ed Miliband becomes business secretary one day? He could expand national security to include climate change and wave his stick at every corner of the economy.

Amendments please

The legislation is not entirely without merit, it just relies too much on the goodwill of those operating it. It is in its early stages and there is some hope that either the Commons or the Lords will amend it. They should do so, to make it legally clear that these powers should only be used in exceptional, limited circumstances, with independent advice, when a defined national security risk has been identified and that the process should be reasonable, quick and confidential. There should also be an independent review or appeals process of some kind and alternative remedies should also be considered, such as holding golden shares in key assets.

As it stands, it seems that all you need to do is to have the temerity of considering investing in a fleet of British buses or a gaming company and you run the risk of finding yourself bogged down in Westminster, in a political bunfight, wondering why you bothered.

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George Trefgarne is founder and CEO of Boscobel & Partners consultancy.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.